This paper investigates whether individuals feel worse off when others around them earn more. In other words, do people care about relative position, and does “lagging behind the Joneses” diminish well-being? To answer this question, I match individual-level data containing various indicators of well-being to information about local average earnings. I find that, controlling for an individual's own income, higher earnings of neighbors are associated with lower levels of self-reported happiness. The data's panel nature and rich set of measures of well-being and behavior indicate that this association is not driven by selection or by changes in the way people define happiness. There is suggestive evidence that the negative effect of increases in neighbors' earnings on own well-being is most likely caused by interpersonal preferences, that is, people having utility functions that depend on relative consumption in addition to absolute consumption.

Using unique Australian data we examine the choice of issuance mechanism for unseasoned equity (between initial public offers and direct placements) prior to exchange listing. Controlling for liquidity in the decision to go public and incorporating interrelated decisions, we find that corporate control concerns and expected underpricing differences between initial public offers and direct placements play an important role. Also the probability of an initial public offer (direct placement) decreases (increases) with information asymmetry and the reputation of the issuer. Further, the choice of issuance mechanism and the underpricing, issue size and ownership retention decisions are interrelated.

We investigate a class of semiparametric ARCH(∞) models that includes as a special case the partially nonparametric (PNP) model introduced by Engle and Ng (1993) and which allows for both flexible dynamics and flexible function form with regard to the “news impact” function. We show that the functional part of the model satisfies a type II linear integral equation and give simple conditions under which there is a unique solution. We propose an estimation method that is based on kernel smoothing and profiled likelihood. We establish the distribution theory of the parametric components and the pointwise distribution of the nonparametric component of the model. We also discuss efficiency of both the parametric part and the nonparametric part. We investigate the performance of our procedures on simulated data and on a sample of S&P500 index returns. We find evidence of asymmetric news impact functions, consistent with the parametric analysis.

We develop a novel model of campaigns, elections, and policymaking in which the ex ante objectives of national party leaders differ from the ex post objectives of elected legislators. This generates a distinction between “policy rhetoric ” and “policy reality” and introduces an important role for “party discipline ” in the policymaking process. We identify a protectionist bias in majoritarian politics. When trade policy is chosen by the majority delegation and legislators in the minority have limited means to influence choices, the parties announce trade policies that favor specific factors, and the expected tariff or export subsidy is positive. Positions and expected outcomes monotonically approach free trade as party discipline strengthens. JEL Classification: D72, F13

We examine the specification and power of tests based on performance-matched discretionary accruals, and make comparisons with tests using traditional discretionary accrual measures (e.g., Jones and modified-Jones models). Performance matching on return on assets controls for the effect of performance on measured discretionary accruals. The results suggest that performance-matched discretionary accrual measures enhance the reliability of inferences from earnings management research when the hypothesis being tested does not imply that earnings management will vary with performance, or where the control firms are not expected to have engaged in earnings management.

We offer an explanation for why raiders do not acquire the maximum possible toehold prior to announcing a takeover bid. By endogenously modeling the target firm's value following an unsuccessful takeover we demonstrate that a raider may optimally acquire a small toehold even if the acquisition does not drive up the pre-tender target price. This occurs because although a larger toehold increases profits if the takeover succeeds it also conveys a higher level of managerial entrenchment and hence a lower firm value if the takeover fails. We derive new predictions regarding the optimal toehold and target value following a failed takeover. We also examine the impact of a rival bidder and dilution.

This paper studies the political viability of free trade agreements (FTAs). The key element of the analysis is the "rent destruction" that these arrangements induce: by eliminating intrabloc trade barriers, an FTA lowers the incentives of import-competing industries to lobby for higher external tariffs, thereby inducing a reduction of the rents created in the lobbying process. Using a conventional competitive model, I show that the prospect of rent destruction can critically undermine (and in some cases rule out entirely) the political viability of welfarereducing FTAs. This result contrasts sharply with findings from the earlier regionalism literature.

The economics of governance is an effort to implement the “study of good order and workable arrangements,” where good order includes both spontaneous order in the market, which is a venerated tradition in economics (Adam Smith, 1776; Friedrich Hayek, 1945; Kenneth A. Arrow and Gerard Debreu, 1954), and intentional order, of a “conscious, deliberate, purposeful” kind (Chester Irving Barnard, 1938 p. 9). Also, I interpret workable arrangements to mean feasible modes of organization, all of which are flawed in comparison with a hypothetical ideal (Avinash Dixit, 1996 pp. 4–9). The object is to work out the efficiency logic for managing transactions by alternative modes of governance—principally spot markets, various long-term contracts (hybrids), and hierarchies. Interest among social scientists, economists included, in the study and practice of good order and workable arrangements has been steadily growing. In contrast with the orthodox lens of choice (prices and output, supply and demand), the economics of governance is a lens of contract construction, broadly in the spirit of James Buchanan’s (2001 p. 29) observation that “mutuality of advantage from voluntary exchange ... is the most fundamental of all understandings in economics.” The economics of governance, as herein described, is principally an exercise in bilateral private ordering, by which I mean that the immediate parties to an exchange are actively involved in the provision of good order and workable arrangements. To be sure, the need for private ordering varies with the rules of the game as provided by the state. Distinctions between lawlessness where the state provides limited or unreliable protection for property and contract (Dixit, 2004) and lawfulness, where the state undertakes to protect property and enforce contracts in a principled way, are pertinent. The first of these applies mainly to primitive and transition economies. The second is commonly associated with Western democracies. Recourse to private ordering under conditions of lawlessness is altogether understandable: given the absence of state support, the * Walter A. Haas School of Business, University of California, Berkeley, CA 94720-1900. The paper has benefited from workshop presentations at the University of California–Berkeley, the University of Valencia, INSEAD (Fountainebleau), and the 2004 annual conference of the International Society for New Institutional Economics. An abbreviated version was also given as the Horst Claus Recktenwald Lecture at Nuremburg on 4 November 2004. Comments and suggestions from Fred Balderston, Ernesto Dalbo, Avinash Dixit, Robert Gibbons, Witold Henisz, Ian Larkin, Steven Tadelis, and Dean Williamson are especially acknowledged. 1 Lon Fuller’s (1954 p. 477) definition of “eunomics” as “the science, theory, or study of good order and workable arrangements” is very much in the spirit of what I refer to as governance. 2 One of the immediate ramifications of insistently comparing feasible alternatives, all of which are flawed, is that the purported inefficiencies that are ascribed to failures to achieve “first best” optimality are not dispositive, but invite the query “As compared with what?” I return to this issue in Section IV. 3 Excluding “corporate governance,” the numbers of articles that used the word “governance” during the period 1998–2000 as compared with the period 1977–1979 in selected economics, business/management, sociology/organization, and political science journals were 60 vs. 1, 76 vs. 4, 79 vs. 18, and 60 vs. 25, where the journals surveyed were: the American Economic Review, Journal of Political Economy, Quarterly Journal of Economics, Rand Journal of Economics, and Journal of Economic Perspectives in economics; Strategic Management Journal, Management Science, Academy of Management Journal, and Academy of Management Review in business/management; Administrative Science Quarterly, Organization Science, American Journal of Sociology, American Sociological Review, and Annual Review of Sociology in sociology/organization; and American Political Science Review, Political Science Quarterly, Journal of Politics, and Political Research Quarterly in political science. Combining these four categories, articles using the word governance increased from 48 to 275 over this 20-year interval. Dixit (2004 pp. 149–50) reports that the number of web pages that turn up under the search for “governance” is huge.

According to DeYoung et al. [Journal of Financial Services Research, 2004] deregulation and technological change has divided the US banking industry into two primary size-based groups: very large banks, specializing in the use of “hard” information to make standardized loans and smaller banks, specializing in the use of “soft” information and relationship development to make non-standardized loans. We evaluate business-lending performance for small and large banks over the 1993–2001 period. Small business lending by small banks is characterized by relationship development and non-standardized loans. Consistent with DeYoung et al.'s model, we find that, after controlling for market concentration, cost of funds, and a variety of other factors that might influence yields, smaller banks perform better than larger banks in the small business lending market. However, larger banks appear to have the advantage in credit card lending, a market characterized by impersonal relationships and standardized loans. Interestingly, we find evidence that larger banks have been making inroads in the market for the smallest business loans, a result consistent with the use of credit scoring by large banks to make very small business loans [Berger et al., Journal of Money, Credit, and Banking, 2004].